Tesco profits rise to £1.6bn

The result came despite "modest" UK sales growth in the 26 weeks to August 28, constrained by higher fuel costs as customers spent more at the pump instead of in store and due to low food inflation.

Delivering his last set of results, outgoing chief executive Sir Terry Leahy said the retailer - which plans to create 9,000 jobs in the UK this year - was experiencing "the tailwinds of recovery".

The firm said UK like-for-like sales excluding petrol rose 1.3% in the second quarter, compared with 1.1% in the first quarter - but, adjusting for VAT sales, the figure was just 0.3% higher over the half-year.

Finance director Lawrie McIlwee said UK like-for-like sales had been modest because "the economy is pretty stagnant" although there were "signs of a recovery".

He said higher food inflation last year made for tough comparatives, while higher fuel costs meant customers had less to spend in stores.

Looking ahead, Mr McIlwee said "the lapping effect" of inflation was decreasing and customers remained loyal.

He said there are now 16.5 million Clubcard holders in the UK, and added: "Tesco customers seem to be much more loyal than our competitors'."

But Mr McIlwee said consumers in the UK still faced great uncertainties.

He said: "We've got the spending review and we've got VAT going up in the second half, but there are signs of a recovery."

Mr McIlwee said Tesco Bank was now a "significant" part of the group's business, with revenues of £474 million in the first half, with trading profits up 12.2% to £129 million

He said new insurance products and a fixed-rate savings account would be made available in the next few months after Tesco recently tied up with Fortis, the Belgo-Dutch insurance group.

Mr McIlwee said Tesco hoped to offer mortgages next year, with a current account to follow, following regulatory approvals from the Financial Services Authority (FSA).

Mr McIlwee shrugged off rising competition from the likes of Waitrose and Sainsbury's.

The most recent figures from consumer research firm Kantar Worldpanel showed Tesco's market share slipping to 30.8% from 30.9%, with growth trailing behind its rivals.

But Mr McIlwee said: "We like competition. It was interesting that Waitrose chose to draw out Tesco, when we are the cheapest on the market."

Mr McIlwee said international business had been "fantastic" with 2% like for like growth, particularly in Asia where the business had seen "sharp improvement".

Tesco now has 20 million Clubcard holders outside the UK, in nine of its 13 international countries, he added.

US business Fresh & Easy is still loss-making, showing 10% growth in like-for-like sales in the half.

Mr McIlwee said there was a future in the US supermarket and the group expects to see it breaking even by the end of 2012/2013 financial year.

The results arrive in an important week for gauging the mood of the British consumer, with updates from rival Sainsbury's and high street retailer Marks & Spencer later this week.